Riding the Bond Bull—With a Helmet

Investors can do this by buying bonds gradually. That way, you won't be too heavily invested when they start to decline. The idea is to maintain the right mix of bonds and stocks, adjusting this mix over time to fulfill your asset allocation — the percentage of different types of assets in your portfolio. A key factor in your mix of investment types is your age. Your allocation should become more conservative as you approach retirement, given your individual risk tolerance . This is why it's generally considered a good idea to decrease the weight of stocks and increase the weight of bonds in your portfolio as you get closer to retirement.

Traditionally, many financial advisors have recommended a set series of asset allocations for investors in given age brackets with given risk tolerances. This includes an allocation to bonds of 55 percent or more for people with a moderate (more or less average) risk tolerance at the age of about 60, despite the fact that people are living and working longer and that the risks of different types of investments change over time as the trends of bond-versus-stock returns show.

A better approach would be to think of your bond allocation as a range, with the precise percentage at any given time governed not just by your age and risk tolerance, but also by changes in bond-versus-stock performance. These changes show the evolving risk/return relationship between bonds and stocks — that despite their lower risk, bonds can outperform stocks for relatively long periods.

Yet, despite bonds' lower risk and current returns, you should moderate your investments in them, taking care not to pass up potentially superior returns from stock investments made in the right measure.

Hockey legend Wayne Gretzky famously said he always skated not to where the puck was, but to where it was going to be. By adjusting your bond-to-stock ratio as you go along — with an eye toward potentially rising interest rates — you'll be more likely to reach the asset-allocation puck and your retirement accumulation goals.

Ted Schwartz, a Certified Financial Planner®, is president and chief investment officer of Capstone Investment Financial Group http://capstoneinvest.net. He advises individual investors and endowments, and serves as the advisor to CIFG Funds. Because Schwartz has a background in psychology and counseling, he brings insights into personal motivation when advising clients on achieving their wealth management goals. Schwartz holds a B.A. from Duke University and an M.A. from Oregon State University. He can be reached at ted@capstoneinvest.com.

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